The general perception in the marketplace is that for successful people who have accumulated a large amount of savings, social security is an insignificant part of their retirement income. Some people may even surmise that social security is such a minimal component of a wealthier person's retirement income that some may not even bother to file for their eligible benefits. As it turns out, social security represents one of the largest single components of an affluent person's retirement income!
According to a 2014 study by Vanguard, a financial services powerhouse, the two largest components of retirement income for the affluent were social security and good old pensions. Surprisingly, it was not from large portfolios of stocks and bonds or other investments.
In this Vanguard study of over 2,600 households, the median income of the group (age 60-79) was $69,500 with median financial assets of $395,000. (The value of their home was excluded). They found that nearly half the aggregate wealth of these households came from the two mothers of guaranteed income programs, social security (28 percent) and traditional defined-benefit pensions (20%).
The median annual income from these households includes $22,000 from social security, with an additional $20,000 from pensions. Tax-deferred retirement accounts came in third (among those who have them) at $13,000.
There is no question that these percentages will gradually change in the coming years, especially with the significant decline in the percentage of the population who will have a defined benefit plan as part of their retirement assets. Most corporations have shifted from defined benefit plans to 401(k) plans in an effort to save money. In doing so, however, they have transferred the risk and responsibility for securing retirement income from the corporation to their employees, many of whom are ill equipped to take on this challenge.
A large portion of income in retirement for the wealthy comes from another surprising source. Work! Twenty nine percent of affluent retirees get some income from employment, with a median annual income of $24,600. For households more reliant on retirement accounts for income, the rate of labor force participation was even higher at 40%. It is likely that the trend to work longer and deeper into retirement will continue to increase as life expectancies continue to increase and the cost to finance a potentially longer retirement also increases.
Clearly, for both the affluent and the not so affluent, social security has become an increasingly important component of retirement income planning. It is likely the largest, if not the only, pension plan that new and certainly future retirees have. It provides guaranteed lifetime income and is also one of the few income sources in retirement that offers a hedge against inflation, given that it provides cost of living adjustments.
As people strive to meet the financial challenges of retirement, the need to fully understand one's social security options and the many ways one can potentially maximize their eligible benefits becomes even more important, if not critical. Unfortunately, social security is an enormously complex program governed by over 2,700 rules. A typical couple could have as many as 567 possible filing options. It's no wonder that over 90% of filers receive less money from social security then they are entitled to.
Today, social security supports over 60 million people and the numbers are expected to continue to grow as the population ages. What is also clear is that the importance of social security in one's retirement also continues to grow whether you are affluent or otherwise. Leaving money on the table should not be an option. Since social security agents are prohibited from offering advice it makes good sense to seek out a specialist in social security planning to help ensure that you receive all the benefits you are entitled to.
Ash Ahluwalia, NSSA, CCSCA, MBA